Big money for small results

By BRYCE WILKINSON*

An article in the respected Journal of Economic Perspectives reviewed the global cost-benefit assessments of the Kyoto Protocol by expert economists. The conclusions were damning.

It found that the protocol "manages to be both economically inefficient and politically impractical".

On some estimates it could cost US$1000 billion ($1991 billion) to achieve the protocol's emission targets. It appears the Third World could be given access to basic levels of health, water and sanitation for much less.

The rub is that the effects on global warming would be scarcely discernible, delaying projected temperature changes by about six years.

The protocol hardly affects projected warming because it does not constrain the growth in emissions from developing countries. India and China's combined emissions are projected to be about 50 per cent of global emissions in a decade.

In reality, the protocol will not achieve even this reduction in projected warming because its targets will not be achieved. For example, the United States accounts for around 25 per cent of emissions and does not intend to ratify the protocol. Neither does Australia.

For a variety of reasons, the countries ratifying the treaty are generally unlikely to be required to take drastic measures during the first commitment period of 2008-12. This defers the real costs of the protocol.

Importantly, it is not yet clear that global action is necessary given the scientific and economic uncertainties. Because of fossil fuel substitution possibilities, atmospheric concentrations of carbon dioxide may not double by 2100 - or at all.

Because of scientific uncertainties, global warming could be modest, even if a doubling did occur. Modest warming could benefit countries with temperate climates.

The Wall Street Journal Europe summed the situation up in March 2002 when it stated that "Kyoto is a monstrosity projected to cost billions, possibly trillions of dollars to achieve a goal that will probably not avert a threat that no one is sure the world faces".

How might New Zealand be affected by projected global warming?

* Modest warming of below 2C to 3C could well benefit New Zealand, reflecting its temperate climate.

* Warming may be only 60 per cent of the global average because New Zealand is surrounded by ocean.

* The mid-point of the scientists' range for the effect of a doubling of atmospheric carbon dioxide is a global average rise of 3C.

How might New Zealand be affected by ratification?

* Ratification will impair economic growth by further undermining property rights and adding to regulatory costs.

* It further distances New Zealand from Australia and the United States, despite our need to seize opportunities to strengthen these relationships for economic and strategic reasons.

* It exposes New Zealanders to potentially major costs beyond 2012.

Why is New Zealand ratifying? Good question.

The Government's National Interest Analysis seemed to indulge in Enron-style confusion about how to account for the sale of carbon credits. The sale of an asset to foreigners is not a gain in income and could reduce wealth if it has to be bought back at a higher price.

Ratification supports the widespread view among chief executives and economists that the country lacks a credible growth strategy.

In the speech from the throne this year, the Government made economic growth its most important task, and stated its belief that the appropriate mix of policies could return New Zealanders' standard of living to the top half of the developed world.

Well said, but how does ratification fit in?

* Dr Bryce Wilkinson is director of Capital Economics.

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